Brexit and frustration: The impact of legislative change on contractual performance

Last week, the English High Court issued a significant decision on the impact of Brexit on contractual relationships. This case concerned the lease of premises in London by the European Medicines Agency (EMA), which the EMA unsuccessfully argued would be frustrated by Brexit.

This case serves as a timely reminder of the need for parties in New Zealand to carefully and specifically allocate the risks of uncertain events in contracts. The doctrine of frustration is narrowly applied and will not necessarily assist.

Facts

In Canary Wharf (BP4) T1 Ltd v European Medicines Agency,[1] the European Parliament and Council had, in anticipation of Brexit, passed a regulation requiring the EMA to relocate its premises to Amsterdam in March 2019. The EMA then wrote to its landlord to advise that its 25-year lease for its London headquarters would be frustrated if the UK left the EU.

Its landlord then issued proceedings, seeking a declaration that the withdrawal of the UK from the EU would not cause the lease to be frustrated. The EMA resisted this on the grounds that:

it would be illegal for the EMA to use or sublet the London premises under EU law; and

Brexit would defeat the common purpose of the lease, such that it would be unjust to hold the EMA to its bargain.

Supervening illegality

The EMA first argued that its lease had been frustrated by supervening illegality. It argued that it did not have capacity to continue to perform its obligations under the lease because an EU Regulation required it move to Amsterdam.

The Court rejected the EMA’s arguments, highlighting the narrow approach that the courts take to the doctrine of frustration. While the Court accepted that there may be good reasons for the EMA to be headquartered within the EU, it considered that the EMA nevertheless had capacity to continue performance of the lease. Even if it were wrong and the EMA lacked capacity to continue performance by reason of supervening illegality under EU law, that was irrelevant for the purposes of the English law of frustration.

The Court also considered that any frustration had been self-induced. The EU “could have done more than simply baldly ordering the relocation of the EMA” to Amsterdam.

No frustration of any common purpose

The Court wasn't convinced that any common purpose of the lease had been frustrated. There was no common purpose that the lease was to provide a permanent headquarters for the EMA for 25 years and that, if this was no longer possible, that purpose had been frustrated. Rather, the lease contained detailed provisions for the assignment or subletting of the premises; it “expressly contemplated that – during its pendency – the EMA might and … could entirely divest itself of the Premises”.

The EMA had also argued that it would suffer financial hardship if required to pay rent for two premises – its existing premises in London and its new premises in Amsterdam. The Court rejected this. It would, the Court noted, have been “obvious” when the EU Regulation was passed that the EMA would have significant additional costs if it had to rent two premises. These obligations were voluntarily assumed and could not now be used to support an argument that the EMA’s obligations ought to be discharged.

Our View

This decision demonstrates that the common law’s “insistence on the literal performance of absolute promises” will ordinarily be applied with rigour. The courts are reluctant to use the doctrine of frustration to help parties avoid the consequences of a bad bargain. It is therefore important for parties to specifically allocate the risk of uncertain events in their contracts. Parties should consider:

including force majeure clauses;

including clauses which allocate the risk of increased costs associated with legislative change; and

the effect of standard form contract clauses on risk allocation, such as interpretation clauses which provide that “any reference to a statute includes any statute which modifies, consolidates, re-enacts or supersedes it”.

Such clauses must be carefully drafted.

If you have any questions in relation to when a party may be relieved from their contractual obligations please contact one of our experts.